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Someone with a background in economics, business, philosophy, and watching the world. I want it to be less Krazy!
My view point is reality, not the make believe world of made up money and the use of force against the innocent. I argue from the economic view point of Austrian economics and the position of individual rights, freedom, reason, and rational self-interest as defined by Ayn Rand.

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Saturday, September 17, 2011

The Right Way to Solve the Entitlement Problem

It is important that I first am clear that I am against the use of government, i.e., the use of force, against the inhabitants of our nation, to provide for benefits of the retired, the sick, the unemployed, business, anyone. Such action by the government is wrong morally, wrong politically, and very bad economics. It should be stopped. It must be stopped. Okay? Is there any question about my position on this (for the justification see Ayn Rand’s “The Nature of Government”).

What I am concerned with in this post is that I have seen people, good, solid, rational people, suggesting solutions to the entitlement problem that I think are not good choices. It is possible that they are not completely setting out their solutions, but what has been offered are insufficient to change the situation.

I want to begin my comments with a question: What do we want to achieve? My answer to this question is that, ultimately, what we want to achieve is a productive, rational society in which we are free to pursue our own goals based upon our own judgment. We want to achieve freedom, capitalism.

Further, we want to achieve this result with the least chaos and human suffering as is possible. We see that if capitalism isn’t achieved we and our fellow man will be in for a lot of suffering, and possibly worse. We may completely lose our freedoms. We may completely lose our stand of living. In an interview on The Dailer Ticker, Yaron Brook emphasized these very points. Stop gap measures will not work. There needs to be a change in philosophy.

Our goal is capitalism, not merely lower government debt or fewer people depending upon the government. Anything but actual capitalism would not be safe or permanent, but would merely delay reinstatement of the government activities that we had managed to reduce. In an interview on The Dailer Ticker, Yaron Brook emphasized these very points. Stop gap measures will not work. There needs to be a change in philosophy.

More broadly, capitalism is the only system in which anyone who puts forth effort can and will find a way to maintain themselves, and to achieve the success they are capable of. Those who do not or cannot put forth the effort will be dependent upon the voluntary support of someone who does. There is prosperity. Capitalism does not support suffering. Contrary to criticism, capitalism does not support poverty, hunger, hopelessness.

The problems with entitlements, in addition to the moral issue, is that in the present situation, entitlements and other government wealth transfers, such as unemployment insurance, are necessarily resulting in massive government borrowing and are moving us inextricably to bankruptcy (in one form or another) and depression. Depression for an advanced country like the United States will be an unprecedented event.

It is obvious to anyone who is honest enough to look that the current situation will result in disaster. The entitlements and wealth transfer payments have to be eliminated. The rapid, dramatic growth in the government debt has to be stopped and brought down. There is no choice. Not doing so will result, as I indicated above, in disaster.

It is at this point that people are then offering some suggestions as to how the entitlement programs could be stopped. However, solutions that focus on the entitlement programs as the main issue are making an error. Stopping these programs at this point will not achieve anything but chaos and massive poverty and illness.

Consider the numbers of people who are dependent upon government programs today. The number of unemployed, (very) underemployed, and that have given up looking for work is close to thirty million people. If you add in their dependents you probably have forty to fifty million. The number of people receiving Social Security is currently sixty million (over forty million aged 65 and older). The number on Medicare is nearly forty million. Those receiving food stamps is nearly forty million. Some of these numbers overlap. Some are gaming the system and fraudulent. But the totals are overwhelming.

Another group of people dependent upon government transfer payments are government employees, federal, state, and local. A fairly recent figure for this group (excluding the military) is nearly twenty million. If you also add in the employees in the private sector who’s responsibility is keeping up with government regulations, you have another large group who are not engaged in productive work and whose indirect reliance on government money has to come to an end. (The government figure does include some who are rationally required, but it is a small percentage, I think.)

In a country of over 313 million people, over thirty to thirty-five percent are wholly dependent upon government funds and are immorally living off the productiveness of others and are an enormous drag on the economy.

The bad news is that if they all, or just the most obvious. were turned loose from their dependency and the government money were turned off, their desperate situation would become a major, immediate cause of riots and distress.

You might say a couple things, for example, that the money freed up will enable the economy to do better, or that the change will happen more slowly. The current problems in the economy is not a question of money, employment, or actually resources but government controls and interference. The constant stream of new government orders, crises, and attacks is finally, after nearly a century, dragging down the possibility of growth in the economy. Merely stopping some government transfers would not be sufficient. It would only possibly delay the result. Nor would the speed of change matter. The economy still couldn’t handle it. That is to say that these people would not be put to productive use. New, productive jobs would not appear in the numbers needed. There would be constant pressure to reinstate the programs or for something worse.

For those people who are retired, the suggested methods of replacing Social Security and Medicare, that is, putting money into their hands based upon some calculation relating to what was taxed in the past would not be sufficient to support them over the remainder of their lives, even if there were no additional general consumer price increases. Nor would they know what to do with the money, since few ever acquired the necessary knowledge.

But besides those points, very important consideration is that the economy would not be productive enough to support the massive number of people who are expected to retire.

All of the problems are interconnected. It is one economy. No freedom, no productive economy, no support in any fashion for the large number of retired people that are in the baby-boomer generation. The issue of the debt hides the fundamental problem of the welfare state. It saps the productive ability of the economy to the point that it can no longer support itself. The build up of government debt is the easiest way for today’s welfare state to finance its programs, but it could use other ways such as massive taxation and high levels of inflation, which would also lead to failure. The problems are the result of the welfare state: its morality and its economics combined.

Let me say this again. The point needs to be emphasized. Our economic structure today and into the foreseeable future will not support the expected number of people retiring over the next decade or two. That is so with or without the entitlement program. Something more has to be done than just ending the programs.

But, more important, the focus is wrong, confused, and misleads us into forgetting our goal. The entitlement programs are a symptom of the wrong philosophy supporting today’s trends in government and the economy. Do not focus on the symptoms. Focus on the philosophy and our goal.

Focusing only on the entitlement programs is also terrifying to those immediately affected and their families. It would terrify anyone who does not want to see wide spread poverty and illness. I am certain that we don’t wish to see that either.

Taking the steps to achieve the establishment of capitalism will also allow us to easily, cheaply, and happily eliminate the negatives (which we should expect would be the result of the achievement of productive values).

The initial steps of establishing capitalism would be the freeing of the productive, creative businessmen. When asked what should be done first to change the economy, Ayn Rand answered, “Start decontrolling the economy as fast as rational economic considerations permit. I speak of “rational economic considerations” because today, every part of the population is dependent on government controls. Most professions have to function under controls, and their activities are calculated on that basis. So if anyone were to repeal all controls overnight, by legislative fiat, that would be a disastrous, arbitrary, dictatorial action. What a free country needs to give all the people concerned sufficient notice to readjust and reorganize their economic activities. Therefore, after working out with economists the kind of program necessary to decontrol the country, and what controls should be repealed first, I would then advise passing legislation announcing that certain controls will be abolished within three years, say – the period calculated to allow people the opportunity to readjust their activities. In a free economy, no change happens out of the blue and overnight. Every economic change, every development, is gradual. Therefore, in a free society, there are no immediate and disastrous changes. But given our present situation, any sudden changes could create disastrous dislocations, and so we should decontrol gradually.” (Ayn Rand Answers, p. 49) She goes on to suggest that the anti-trust laws can be gotten rid of immediately, especially laws that jail businessmen. She points out that the decontrol of the economy will then pretty much eliminate our economic problems. That means, today, that the debt issues and the economic aspects of the entitlement programs will be come easier to solve. Decontrol would also result in the creation of lots of new, productive jobs.

This prospect, the resulting productivity, prosperity, and creation of wealth, will be the foundation, along with the morality of self-interest, for convincing people that ending the entitlements is going to cause, at worst, only a brief period of difficulty and the long-run result will be significantly better than Social Security and Medicare. (I have written about how these programs can be funded for those unable to rejoin the job market.)

Within a few years the older population will be the majority of voters. Many of the arguments for changing the system have to be aimed at them. They have to be shown that they will not be abandoned, that they will do okay. Merely coming up with a nice sounding set of steps will not work. It shouldn’t. Do you expect the average American retired person to accept an idea that requires him to live in abject poverty for the remainder of his life? If you want the support of intelligent people you need to show precisely how it will work. You say that they can’t expect that things will go wonderfully. No. And if you do your job right and make clear that if they don’t allow the change to happen, if they do not clamor for the change to capitalism to happen, they necessarily will live in abject poverty for the rest of their lives, then they will be able to put up with some discomfort.

Let me say this again: People have to learn that the current situation is going to result in misery. It can not survive. Depression is our future. That is their choice: depression or capitalism.

Winning the war to put man on a rational course requires both the moral and the economic argument, with full knowledge of the consequences for everyone of each step. We have to communicate and justify the idea that capitalism will be a real road to prosperity and that there is no other road. The argument is not just the moral. It is about all of reality, with a major focus on the economics. People do not know the economics of capitalism (or the world they live in now) any more than they know the morality. Neither will be a strong enough argument by itself. Combined, they are intellectually overpowering. All it takes is finding people who are willing to look at reality and showing it to them.

"Unknown", To a limited extent, I understand and agree with your first point. Certainly, few even know of a different morality and of capitalism let alone agreeing with those points. But to a great extent, your comment is going to limit your view. As has been pointed out by people more observant than I, BO and the current economic problems have made people concerned. The time is ripe for education and influencing the future. Now is the time to make the culture ready. Between the problems at home and the problems in Europe, we have all of the ready reality we need to make our points. We say, "Change or go into deep depression. Those are the only options." If we do not take advantage of our opportunities, nothing good can happen. The culture isn't going to change by itself. We have to do it. What reason is going to stop it from changing quickly when the option is distruction?

Which brings us to your second point. If we do reach a depression we will have had to make great strides toward impressing an understanding of capitalism on the culture. Otherwise, capitalism will be blamed for the crisis, just as capitalism has been blamed for a hundred years. We may not have the chance to establish freedom after the disaster.

I don't like the fatalism in your second point, either. I know that the present situation, unchanged, will lead to depression. Yet, we do not "have to admit that depression will still be necessary." The only thing we have to admit is that only the use of reason will result in man's survival and flourishing. Failure is not mandatory.